You are trying to value three-month call and put options on Merck, with a strike price of 30. The stock is trading at $28.75, and expects to pay a quarterly dividend per share of $0.28 in two months. The annualized riskless interest rate is 3.6%, and the standard deviation in ln stock prices is 20%.
a. Estimate the value of the call and put options, using the Black-Scholes.
b. What effect does the expected dividend payment have on call values? on put values? Why?